From the Ground Up

By Kirk Kardashian, January 2012Published Jan 25, 2012

It’s been almost a full year since popular revolutions in Tunisia and Egypt spread into Libya, where for decades Moammar Gadhafi ruled like a storybook despot. Gadhafi and his family exercised strict control of the country and its oil wealth, amassing lavish personal fortunes while denying Libyans the skills necessary to join the modern global economy. But a lot has happened in the last 11 months: Gadhafi was deposed from power in August, killed in October, and Libya was formally liberated just three days later.

Now comes the messy process of turning the country into a place with human rights, transparent government, and open commerce. Few people know more about what that transformation will take than Diederik Vandewalle, an adjunct associate professor of business administration at Tuck who teaches a mini-course on doing business in the Arab Gulf states.

One thing’s for sure: Unlike other developing economies, money won’t be a problem. In addition to the constant income from oil, it’s estimated that $180 billion in assets frozen during the revolt will soon be flowing back into Libya. “The challenge will be the efficient use of money in a system where corruption and lack of regulation was rife,” Vandewalle says.

Vandewalle, who is also an associate professor of government at Dartmouth College, has studied Libya closely for the past 25 years, and 2011 was an especially busy time. Since the country was freed from Gadhafi’s grip, Vandewalle has been consulting almost non-stop with a wide variety of companies and international organizations. As a new Libyan government fills the vacuum of power, he has been asked the same basic question again and again by business leaders: If we make an investment today, how much certainty do we have that we’ll still be able to operate two years from now?

“It’s a very interesting question,” Vandewalle says. “On the one hand, I’ve worked for a while on Libya and I’m very hopeful that the country will do well. But on the other hand, I’m also very aware of the pitfalls, and I’m a little worried about what’s coming down the pike, mostly about the enormous inflows of capital that make economic management more difficult.”

How would you characterize the business environment in Libya when Gadhafi was in power?

One of the major problems was that in principle there were some legal stipulations about how to do business, how the oil companies had to invest, and so on, but in reality, of course, all of that was circumvented by the fact that Gadhafi and his family and a very close circle of friends were really dominating and controlling just about any contract that was signed. There was no accountability and virtually no transparency or rule of law.

What kind of government has been put in place in Gadhafi’s absence?

When the rebellion was still taking place, there was a transitional national council (TNC). It has now appointed a cabinet. So, in principle, they do have a government in place, but that is still not an elected government, it’s appointed. It is not seen as truly legitimate by some actors. But the really big problem for Libya is that the central government still doesn’t have the power to impose its will. There are literally hundreds of militias with their own arms and leaders that just kind of run amok in many ways.

What has to happen in order for a vibrant and diversified economy to emerge?

First, you need the rule of law. Second, you really need a neutral and professional bureaucracy that can guide investments and provide information. Linked to that, you need an educated workforce that can deal with these issues. The teaching of English was forbidden for long periods of time, and so you get to talk to these people who are supposedly in charge of major companies, who barely speak English. Finally, the banking sector will need to be built up. The country will want to build an Islamic banking system, and it will be very interesting to see how much money flows into that system and how they will deal will the pre-existing contracts that contradict Islamic banking principles.

What are the business opportunities in a new Libya?

There is a whole range. Beside the oil sector, there are companies lining up that want to go into educational ventures, manufacturing and tourism—Libya has some of the most beautiful Roman and Greek ruins in the entire world that have never really been exploited for commercial purposes. Literally, there is investment and expertise needed across the entire economy.

You’re teaching a mini-course soon on doing business in the Arab Gulf states. How does that region differ from North Africa?

In a sense, they’ve been outside the Arab Spring. They’ve used an enormous amount of money to simply keep people politically quiescent. The Arab Gulf states have spent up to $150 billion since last year, when the troubles started, to assure their population that the government is still here to provide for them, which keeps them quiet.

Do you see a form of democracy taking shape in Libya?

There are a lot of people, including myself, who say we need to be careful of simply having a veneer of democracy without having the necessary consensus and institutions. Otherwise what you end up with is hollow electoralism—yes, you have elections, but they don’t really mean anything. The Libyans have thought about that very carefully and are considering the best democratic system within the kind of political culture they live in. No matter how you provide transparency and accountability, that is major progress for a country like Libya.

How long do you think it will take for the legal and economic systems to mature?

That’s what a lot of companies want to know. My hunch is that it really depends on one major factor: to what extent the government can really get power centralized and do away with these militias. If they can get the order issue sorted out, I think they can move forward within a year.